Asia market outlook 2019

After a tumultuous 2018, the positive signs into 2019 paint a brighter picture for Asia. While the lift in sentiment will perhaps be the trigger, the more benign macro backdrop would make more upsides one to seek this year.

Asian markets Source: Bloomberg

There had been little contention that emerging market equities, particularly Asia, had been in focus as we head into 2019. With prices battered by the overtly weak sentiment in 2018 over issues ranging from US-China trade friction and to Federal Reserve's (Fed's) mispolicy, the attractiveness of regional shares had improvement significantly. The question would be how the macro picture will shape up to direct the price trend for a year that remains seemingly fraught with uncertainties.

iShares MSCI All Country Asia ex Japan ETF chart

iShares MSCI All Country Asia ex Japan ETF chart

US-China trade optimism

The biggest item on the table had been of little doubt the US-China trade impasse that carried over from 2018. With the turn of the year, the situation had taken a positive turn as the first round of talks between the two sides in Beijing yielded broadly positive rhetoric, increasing the probability of a resolution. This forms a stark contrast from the second half (H2) of 2018 where tariff threats and exchanges had been rampant against the backdrop of a vacuum of talks, sinking Asia indices into bear market territory. Tangible impact had also been seen as one would note the slowdown in China’s economic indicators into the end of 2018, particularly the entrance into contractionary territory for both the official and private Caixin manufacturing purchasing managers index (PMI) for December.

It is estimated that with an approximate 10% decline in the yuan’s value against the greenback, China would be able to withstand the impact of the tariffs only until the most recent implementation. A further rise for the latest 10% tariffs to 25% for the $200 billion worth of Chinese goods would jeopardise growth significantly, and this is not taking into account the damage this had already been done to business and consumer sentiment.

The above said, both the US and China had displayed concrete efforts in working towards a resolution. US delegates travelled to Beijing in the first full week of January for talks while Chinese Vice-Premier Liu He is expected to arrive in Washington at the end of January to continue the talks. Equity markets had broadly taken well to this development though Asia markets had lagged their US counterparts, remaining largely in the state of consolidation in anticipation. This is not a surprise having witnessed the friction between the two counties in 2018, where one would note that the issues in contention are difficult to resolve, particularly those around ‘intellectual property protection, non-tariff barriers, cyber intrusion and cyber theft’ - listed as outstanding issues by the US. It may not be until the 11th hour before a deal comes through, or potentially even after one more round of tariffs. The view, however, is that the impact from tariffs had started to bite and that may well find us a resolution in time to come. For the time being, however, it may be a slow climb for Asia markets with volatility in store, one perhaps cherished by short-term swing traders.

Fed patience

Serving as the biggest culprit in tipping US markets over into the end of 2018 had perhaps been the concerns of over-tightening by the Fed. This is particularly with Fed chair Jerome Powell dismissing the market gyrations and thereby worsening the plunge.

Fast forward to January 2019, we have seen the switch in attitude from Powell in his first two speeches - assuaging fears by showing considerations for the market gyrations. The Fed’s ‘ability to be patient’ indication coupled with the acknowledgment that the policy path ahead is ‘less clear’ had invited markets to strongly pare back expectations for 2019 Fed hikes. As of mid-January 2019, one would note that Fed funds futures suggested that the market leaned strongest towards a status quo end to the year, as computed by the CME FedWatch tool. While the possibility of one or a maximum two hikes for 2019 should not be ruled out for the data-driven Fed, there is a broad recognition that the central bank is set to pause in their latest cycle. This would be music to the ears of Asian markets. The only caveat here is US growth going too fast or slow, compared to expectations that could dent markets in Asia.

China growth concerns

While a cause of its own amid China’s deleveraging efforts, the slowing down of the Chinese growth engine had largely been seen as a result of the US-China trade friction of late. As mentioned above, the most prominent example had been the descent into contraction territory for the manufacturing PMI figures. With such an outlook, one would no doubt wonder whether this would drag on Asia or even global markets.

The good news is that since the December 2018 Central Economic Work Conference, the confirmation of stronger reflation measures in 2019 had seen corresponding action thus far. The first 100 basis points reserve ratio requirement cut in the new year had been followed by promises of further stimulus. The timing of these updates had also appeared timely, with the latter coming a day after the disappointing December 2018 trade data. While the measures are not expected to boost growth, with reports that China is looking to lower their growth target to 6.0% from 6.5%, they would could go a long way to help stabilise the current slowdown and likewise pare down concerns. Correspondingly, expect Asian markets to respond in tune to the support coming through from the authorities with these bolster shots.

China Manufacturing PMI chart

China Manufacturing PMI chart

Elections year

There is no shortage of politics influence in Asia this 2019 as well, with elections expected in Thailand, the Philippines, Indonesia and India, amongst others. Amongst the few, the Thai and Indian elections may perhaps be the ones to gather the most attention. Over in Thailand, the ending of military rule has undergone several delays, with the current prospective date for elections postponed to March 2019. For India, elections will occur between April and May this year. Elections, typically, have a boon effect for the domestic stock market, whether from a spending perspective or the elimination of uncertainties. Track the changes through the likes of the India 50 for the elections in India.

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